Are Bumitama Agri Ltd.'s (SGX:P8Z) Interest Costs Too High?

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Simply Wall St

Mon, May 13, 2019, 6:48 PM

Investors are always looking for growth in small-cap stocks like Bumitama Agri Ltd. (SGX:P8Z), with a market cap of S$1.2b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into P8Z here.

P8Z’s Debt (And Cash Flows)

P8Z has built up its total debt levels in the last twelve months, from Rp4.7t to Rp5.2t , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at Rp299b to keep the business going. Moreover, P8Z has produced cash from operations of Rp1.5t over the same time period, leading to an operating cash to total debt ratio of 29%, signalling that P8Z’s operating cash is sufficient to cover its debt.

Can P8Z pay its short-term liabilities?

At the current liabilities level of Rp6.4t, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.37x. The current ratio is calculated by dividing current assets by current liabilities.

Can P8Z service its debt comfortably?

With a debt-to-equity ratio of 58%, P8Z can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if P8Z’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For P8Z, the ratio of 51.09x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as P8Z’s high interest coverage is seen as responsible and safe practice.

Next Steps:

P8Z’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. However, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven't considered other factors such as how P8Z has been performing in the past. I recommend you continue to research Bumitama Agri to get a more holistic view of the stock by looking at: